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January 31, 2013

Richard Bernstein: ‘Greatest Bull Market of Our Lifetime’

“We have been and will continue to be extremely bullish,” Richard Bernstein began his presentation on Thursday. “This could be the greatest bull market of our lifetime. It could rival the bull market from 1982. It won’t be like that all over the world, but certainly here in the U.S.”

The former chief investment strategist at Merrill Lynch and current CEO of Richard Bernstein Advisors delivered “Fear and Indecision: Sounds like a Bull Market” to attendees at TD Ameritrade Institutional’s annual conference in San Diego. While he made some tall claims to a seemingly skeptical audience, he had the arguments and numbers to back them up.

He began by noting bull markets are not “wine and roses.” They are periods of fear, indecision and uncertainty, which he called “the word of the day.”

“Has anyone not heard that word in in the past week?” he asked to laughter. “That word is screaming like a sign on the highway saying ‘Opportunity!’ We shouldn’t worry about uncertainty; we should worry when everyone is certain.”

Citing statistics from Dalbar, he noted that investors have missed every bull market over the past 20 years, what he called “an abysmal track record.”

Posting a slide called Fear and Indecision, he noted the bull market of the 1980s is remarkably similar to what happening today. He also noted that the market was up 13% in January 1987. It was at that point that everyone rushed in, which was just prior to the 1987 crash.

So what kept them out for so long? Bernstein listed the following reasons:

Inflation

Budget deficits and debt

Slowing profit margins

Runaway monetary policy

Oil prices

GDP growth between 0% and 2.5%

Tax policy

Sovereign debt

Federal entitlements

“Sound familiar? I don’t say to discount any of these completely; they are all still important. All I’m saying is don’t think like a politician; don’t listen to Washington. Think like an investor. It’s not about a good economy or a bad economy. It’s about whether the economy is getting better or getting worse.”

In the 1980s, he continued, everybody worried about the items just mentioned. When they realized it really didn’t matter, it was the “eighth or ninth inning. At that point it was too late.”

Posting another slide that listed the signs of a typical bear market, he argued the following:

Fed tightening—Fed tightens and the yield curve is inverted. Is the fed about to tighten? Unlikely.

Valuation—Is the stock market over valued? No, according to our models.

Overenthusiasm—Is there overenthusiasm? It seems quite the opposite. Companies are actually still hoarding cash. Wall Street strategists are recommending the lowest equity waiting in nearly 30 years.

“We’re seeing continued outflows from domestic mutual funds into emerging markets. Recently, these flows broke a record for the most in history. Uh, oh; there’s that certainty.”

The United States is a great growth story, he argued.

“The Russell 2000 index has the greatest potential for growth of any index and a world,” he said before conceding, “but I know what you’re thinking, you don’t believe it. We trust numbers coming out of China and Brazil, but not the Russell 2000? C’mon.”

He the pointed to three equity themes his firm has identified:

American industrial renaissance—Executives are realizing the true costs of outsourcing are too expensive. As a result, jobs are flowing back to the United States.

It is early in the cycle for Europe

Japan is reflating

He also added one fixed-income theme:

Treasuries as a diversifying asset class. They are the only major asset class negatively correlated to all other asset classes.

“The bottom line is that opportunities exist with fear and indecision,” he concluded.

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